The Fruit Loop Company bottles and distributes Fruity Ade, a fruit drink. The be

Question

The Fruit Loop Company bottles and distributes Fruity Ade, a fruit drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 70 cents per bottle. For the year 2017, management estimates the following revenues and costs. Sales Direct materials Direct labor Manufacturing overhead- 2,500,000 Selling expenses variable 80,000 250,000 40,000 150,000 60,000 Selling expenses fixed 50,000 Administrative expenses variable variable 270,000 Administrative expenses- Manufacturing overhead- fixed fixed 380,000 Instructions (Show all Calculations) (a) Prepare a CVP income statement for 2017 based on management's estimates. (b) Compute the break-even point in (1) units and (2) dollars (c) Compute the contribution margin ratio and the margin of safety ratio (d) Determine the sales dollars required to earn net inc ome of 624,000

Explanation / Answer

a.

CVP Income statement

b. Break even point in units = Fixed expenses / Contribution margin per unit

Sales in units = $2500000 / 0.5

= 5000000 units

Contribution margin per unit = Contribution margin / Sales in units

= $1300000 / 5000000 units

= $0.26

Breakeven in units = $780000 / $0.26

= 3000000 units

Breakeven in sales dollars = Fixed expenses / Contribution margin ratio

= $780000 / ($1300000 / $2500000)

= $780000 / 0.52

= $1500000.

C. Contribution margin ratio = Contribution margin / Sales

= $1300000 / $2500000

= 0.52 or 52%

Margin of safety ratio = (sales - break even sales) / sales

= $2500000 - $1500000 / $2500000

= 0.4 or 40%.

d. sales dollars to earn profit = $780000 + $624000 / 0.52

= $1404000 / 0.52

= $2700000.

Particulars Amount($) Amount($) Sales $2500000 Variable expenses: Direct materials $360000 Direct labor $450000 Manufacturing overhead $270000 Selling expenses $80000 Administrative expenses $40000 Total variable expenses ($1200000) Contribution margin $1300000 Fixed expenses: Manufacturing overhead $380000 Selling expenses $250000 Administrative expenses $150000 Total fixed expenses ($780000) Net income $520000.

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